Pricing alone does not make your business model

Most software vendors (ISVs) struggle how to price their solution, specifically when moving the cloud. Many vendors are trying to “retrofit” the current model to the new cloud model, but this just does not work. You just can’t make your pricing to reflect your current business model where everything is based on higher cost structure such as Cost of Customer Acquisition (CAC), cost of having a different operational model in your organization such as support, marketing etc.

When I look back at all of the workshops that I have done in the cloud transformation field, each and every ISV has had to recognize that something has to change in the model and we use the Business Model Canvas to do a simple “sanity check” what kind of things the organization has to change to be able to make this transition. I am not talking about organizations that are “born in the cloud” but organizations that typically have a successful traditional software business with good but declining maintenance and support revenue. Many of these organizations are now forced to rethink their current business model as smaller and nimbler organizations are “eating their lunch”.

This does not impact only ISVs, but also Systems Integrators (SI) that are used to the “big ticket” development projects and many end user organizations are tired to the ongoing and inflexible “platform” that has been created. This comes back to my previous blogs where I recommend organizations to go to the roots and identify what is “good enough” as a solution for people to be able to manage their business without having to deal with monster projects.

In the end of the day, pricing is just one small piece of the overall puzzle and therefore it is easy to say that without value, people are not willing to pay and if you do not bring value, your overall business model will never work. The Business Model Canvas has 9 building blocks and if one of these building blocks equal zero or is dysfunctional (some are not needed like channel), then the entire business will fail sooner or later. Check out the Business Model Canvas Structure that has been defined by Dr. Osterwalder:

I am a believer in value-based pricing with the recognition that there are competition out there that will eventually force you to evaluate the pricing levels. Just look what is happening with Amazon and Microsoft on the cloud infrastructure front. It is a bloody battle but this is of course great for the consumers and businesses as the cloud becomes even more affordable and non-brainer as development platform.